Anyone unfortunate enough to have watched any of the Congressional hearings on any of the myriad of topics that that august body deemed necessary enough to haul someone in front of them for showed the Nation if not specifically their constituents that our hard earned tax dollars really are(n’t) at work but gave us all a very good idea of one of the definitions of the word “drone”.
Another definition, referenced increasingly more often these days, is that of an unmanned aerial vehicle or with deference to those who speak in letters, UAV. Had Congress not run into such steadfast opposition to their order for a handful of new G-5’s we might actually have had the opportunity to see both definitions combined.
The drones our military is using are a very good example of our tax dollars at work as every mission flown by a UAV keeps flesh and blood soldiers out of harm’s way. A recent drone strike was precise enough to take out the chief of Pakistan’s Taliban, Baitullah Mehsud, whose acts of terror included the assignation of Benazir Butto in 2007 and the bomb that killed 54 people at the Marriott Hotel in Islamabad last September, as he lounged on the roof of his father-in-law’s compound.
The industrial-military complex in the U.S. is an oligopoly of sorts with names like Lockheed Martin (LMT), Boeing (BA) and Northrop Grumman (NOC) being three of the half dozen or so main contractors. Other firms supply more focused expertise but those are not always public firms and if so rarely have issued debt so the lack of a viable CDS market precludes them from this discussion.
The budget for 2010 includes approximately $3.5BN for UAV’s. Of this $1.3BN is allocated to the purchase 60 models known as “The Reaper” which can carry of up to 3 tons of munitions; has a top speed of 260 knots and can cruise at 150-170 knots for hours at a time. For comparison the cost of the next generation F-35 Lightning II fighter will cost over $10BN for just 30 planes.
Executives at NOC said that business was robust despite the Pentagon’s efforts to cut back on some high profile weapon’s programs, during a recent earnings conference call. In a rare exception for companies reporting 2Q09 results, NOC’s top line increased by 3.8% to $8.96BN although pension expenses and sinking profits in their shipbuilding division produced a 20% reduction in the firm’s bottom line.
NOC’s CDS/equity combo was range bound for most of the year but the usual negative correlation seems to have fallen apart as of late with the CDS hitting its low for the year of 29bps on 7/31 and rising since to close at 45bps last night while the stock traded at $43.41 on 7/27 but has since moved positively correlated to the CDS and closed last night at $49.36.
If the executives were correct in their assessment that NOC has kept most of their projects and can make up for any misses with new work then it would appear that the stock part of the NOC equation is correct. If the conference call was all camouflage then the CDS might win the battle.
Either way the idea of winning wars without sacrificing soldiers seems like the best solution to an absolutely horrible problem.
Enjoy the week.
